RBA Says Hard to Judge If Low Rates Offset Mining, Budget

Glenn Stevens, governor of the Reserve Bank Of Australia. Markets and most economists predict Governor Glenn Stevens and his board will leave borrowing costs unchanged for the rest of this year to spur hiring and avoid a growth gap emerging as mining companies plan fewer projects. Photographer: Brendon Thorne/Bloomberg

June 17 (Bloomberg) -- Australia’s central bank said it’s
hard to gauge how much low interest rates will offset a drop in
mining investment and tighter fiscal policy, adding that the
currency was providing less assistance to rebalancing growth.

“Those uncertainties were likely to take some time to
resolve,” the Reserve Bank of Australia said in minutes today
of its June 3 meeting, where it kept the benchmark cash-rate
unchanged at a record-low 2.5 percent. “The expectation of
substantial falls in mining investment, below-average growth of
public demand and non-mining investment remaining subdued for a
time implied that the pace of growth was likely to be a little
below trend over the rest of this year and into next.”

Markets and most economists predict Governor Glenn Stevens
and his board will leave borrowing costs unchanged for the rest
of this year to spur hiring and avoid a growth gap emerging as
mining companies plan fewer projects. The government last month
announced a fiscal tightening strategy that may drag on growth
and consumer sentiment and, together with weaker data, reinforce
the view that rates are likely to remain on hold.

The central bank repeated that the current accommodative
stance of policy was likely to be appropriate for some time.

The Australian dollar has risen 7.3 percent since the RBA
adopted a neutral bias in February, erasing part of its 14
percent drop last year. The currency traded at 93.82 U.S. cents
at 11:32 a.m. in Sydney from 93.90 cents before the minutes.

Exchange Rate

“The earlier decline in the exchange rate was assisting in
achieving balanced growth in the economy, but less so than
previously as a result of its higher levels,” the RBA said,
repeating the June 3 phrasing. “Members noted that the exchange
rate remained high by historical standards, particularly given
the further decline in commodity prices over the past month.”

An Australian-dollar index of the nation’s main commodities
fell for a fourth month in May, and is down 9.5 percent this
year, reflecting concern about China. Prices of iron ore,
Australia’s biggest export, slid 34 percent since Dec. 31 and
fell as low as $89 yesterday, the weakest since September 2012.

Growth in China, Australia’s biggest trading partner, has
been slower than in 2013, “with outcomes having been a little
mixed of late,” the RBA said. Policy makers said companies’
investment intentions in Australia imply that “mining
investment would fall quite sharply” in 2014-15.

The board said “that at current prices most iron ore
production in Australia was thought to be profitable, but that
some iron ore producers in other countries were likely to have
begun to incur losses,” the minutes showed.

Labor Market

Loose monetary policy in Australia has helped encourage
hiring, with unemployment holding at 5.8 percent for past three
months, after reaching 6 percent at the start of the year, and
the economy adding almost 100,000 jobs this year. Coles
supermarkets and Woolworths Ltd. are among companies hiring
employees.

“Data for the labor market suggested that demand for labor
had improved over the early part of the year,” the RBA said.
“Forward-looking indicators were higher than they had been, but
still at levels consistent with only moderate employment growth
in the months ahead. The spare capacity in the labor market was
leading to low growth of wages, which was expected to persist.”

A range of indicators show that a “significant recovery
was underway” in housing construction, while growth in prices
of established homes had eased from a rapid pace in 2013, the
central bank said.

Inflation Target

It said inflation was forecast to remain within the target.

Australia’s Liberal-National government said in its May 13
budget that it will cut spending on welfare and the public
service and impose a tax on the highest paid as it sets a path
to surplus. RBA board members said the change in the budget
position in the next couple of years is forecast to proceed “at
a similar rate to earlier episodes” of budget tightening.

“Beyond that horizon, the budget implied a more
substantial fiscal consolidation than had earlier been
projected,” the RBA said.